In today’s Finshots, we see why the government wants PSUs (Public Sector Undertakings) to pay more dividends into its coffers.
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The Story
The Indian government makes money in different ways. Its coffers clink when you pay your income tax or indirect taxes like GST (Goods and Services Tax), customs or excise duties. These taxes are the primary source of revenue. And then there’s also the money it gets from divestments. Simply put, the government owns a stake in many companies such as the State Bank of India — and they might choose to sell a part of their stake in these public sector undertakings (PSUs).
And every February, the government makes an estimate of how much revenue it’ll make in the upcoming financial year and then outlines its expenses accordingly. For instance, for FY24 the government hopes to rake in ₹33.61 lakh crores in tax revenue and get around ₹51,000 crores from disinvestments.
Now remember, these are just estimates. A lot of things can go wrong during the year. The economy can get worse and people and businesses might make less money. So the tax revenues could take a hit. Meanwhile, the stock market could go through some pain and the government may not find takers for PSU shares it is trying to sell.
But, the expenses have to be met as promised. If they don’t, they could face some backlash from the public. And this means the fiscal deficit starts to widen. Simply put, it’s a situation when the government spending is more than its earnings. And to bridge this gap, they might have to resort to borrowing more money. That’s not a good thing because it shows that the government isn’t smart enough about its estimates. But also, if the government borrowings keep rising, lenders will start demanding a higher interest rate. They might deem the whole business risky.
So yeah, it becomes quite a tricky situation.
And it seems like that’s where the Indian government finds itself today. See, the tax collections are good so far. Everything seems to be on track as the economy chugs along. But the problem is in the divestment department. As of now, only 16% of the target has been met. Blame it on the speed bump in unloading its stake in IDBI Bank or whatever, but, the government is falling behind.
But they still have to stick to their spending promise without resorting to borrowing money, right? So what can they do?
Well, there’s a secret weapon — dividends!
You see, there’s one advantage of the government owning shares in companies. When the companies make profits, they might choose to share it with shareholders. That distribution is called dividend. And since the government owns a hefty stake and basically controls 70 PSUs listed on the stock exchange, it might simply tell them, “Hey, we’re in need of some cash. You’re making profits. So why don’t you send some money our way? Pay us dividends.”
And media reports indicate that the government is doing just that right now. It’s urging PSUs to cough up dividends.
Now here’s the thing, there are already rules in place that tell PSUs to pay a 30% dividend on profits after tax. Or 5% of their net worth. Whichever is higher. But that’s just the bare minimum. If a company makes quite a bit of profit but doesn’t have too many opportunities to invest it for growth, they might simply add it to the cash pile. They may not share. For instance. these PSUs had built cash reserves of a whopping ₹2 lakh crore in FY13. They weren’t investing it into big growth opportunities either and it forced the government to ‘demand’ dividends.
Also, if you think about it, if PSUs start paying higher dividends, it might attract investors who like these payouts. Brokerages are already gung-ho about Coal India’s profits and cash reserves this financial year (FY24). They think the company could end up paying its highest-ever dividend. And they have a ‘buy’ rating on the stock. That might nudge investors into buying the stock. The value of the company could zoom. And eventually, the government could use that opportunity to even pare its stake. Everyone wins.
But there’s a flip side to this practice too.
Remember the furore over Hindustan Aeronautics Ltd (HAL) in 2019? This PSU was forced to borrow ₹1,000 crores just to pay staff salaries. It was the first time in its history that it had to resort to something like this. And HAL executives blamed the government. They pointed out that while HAL’s revenue grew by around 18% in four years, the quantum of dividends had increased by nearly 125%. They had to dig into their reserves for this and it depleted everything. The company was on the brink of collapse. Now remember, this is a company that’s quite crucial to India’s defence plans and it still suffered such a fate. And it’s not just HAL but many other struggling PSUs that might encounter this problem too.
So yeah, it’s a fine line between using the idle cash wisely or squeezing out dividends when the PSU can barely afford to make ends meet. It’s something the government will have to keep in mind.
Until then…
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